Why the online/offline split no longer matters

This article was taken from the March 2014 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content bysubscribing online.

Early in 1999, when Robin Terrell was managing director of Amazon UK, the company postbag would regularly contain a particular form of correspondence. Customers would send handwritten letters to the newly launched online retailer's headquarters on an industrial estate in Slough, drawing attention to something extraordinary: they had dialled up the Amazon website, searched its catalogue for a product, paid for it using a credit card, waited a few days and then a deliveryman had arrived at their door with a box, inside which was the book they had ordered. The transaction was enough to prompt not just correspondence, but wonder: it wasn't the product that excited the consumer, it was the fact that the process had worked. "These days you're more likely to get a call from a customer because they've got a different type of asparagus," says Terrell, who now runs Tesco's multichannel activities after spearheading digital at John Lewis and House of Fraser. "The internet has changed people's expectations completely."

Tesco

Christoffer Rudquist

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Terrell's colleague, Luke Vinogradov, the mobile-experience director at Tesco, has a different story. Around 1999, he was developing mobile products, he says at a boardroom table in a temporary office space in Clerkenwell, London. "We thought they were cool, but they failed to enthuse anyone other than tech experts."

A decade and a half later, consumers have caught up with the technologists. According to eMarketer, by 2017, 65.8 per cent of Britons will use smartphones. And, increasingly, they will be using them to embark on what executives in retail and advertising refer to as a "customer journey": exploring, locating, scanning, comparing, couponing, searching, bargaining, checking out and -- the ultimate goal -- paying. They will be doing these things when they're not uploading photos to Facebook of themselves wearing a new piece of merchandise, tweeting at customer service to complain about an unsatisfactory delivery, or posting Instagram images of epic product-fails that a retailer would rather was kept quiet. "Brands can't lord it over consumers now," says Antonio Bertone, a former marketing chief at Puma. "Before, it was about wearing the flag of the brand. Now consumers are turning themselves into brands through social media. Gap doesn't make you cool; you make Gap cool by choosing to wear it."

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The implications are significant: a report by Barclays Corporate suggests that mobile commerce will grow by 55 per cent in the next five years -- faster than any other retail channel -- with annual UK consumer spend reaching £19.3 billion within a decade.

But this will make up only five per cent of the total value of UK retail. The overwhelming majority of consumer spend will still take place in stores -- eMarketer claims that by 2017, 84 per cent of UK retail activity will still take place within bricks and mortar. "Our research shows that more than 40 per cent of shoppers walking out of stores have done some form of 'pre-shopping'," says Paco Underhill, a New York-based environmental psychologist and the author of Why We Buy. Digital commerce will not exist as a separate entity -- it will augment what's happening in the real world. For example, more than half of us use a mobile device while in-store -- typically comparing prices. "The early days of e-commerce were about getting stuff online," says Michiel Kotting, a venture capitalist at Accel who was part of the management team at shopping.com. "Now it's building brands. We're seeing things like pop-up stores to capture specific markets, or concept flagship stores merging into the offline. There's a move from plain e-commerce to brand building."

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Robin Terrell, group multichannel director at Tesco, and an online/offline retail evangelist

Christoffer Rudquist

Not every physical store will make it -- as HMV and Blockbuster have found. But many real-world stores will thrive as a digital component becomes part of the customer journey. What will change is simply that the consumer experience will exist at the intersection of online and the high street. As Martin Gill, an analyst at Forrester, puts it: "Where the transaction happens is not the big prize -- it's how you influence that transaction using digital."

Bring the online experience into the real world There was a time when sales assistants at Burberry would have carried tape measures. These days, those working at the luxury retailer's 545 stores, concessions, outlets and franchises across the world are rarely seen without iPads. On a recent afternoon at the brand's flagship London store on Regent Street, the noise of a jackhammer competed with the rock soundtrack favoured by the company's chief creative officer and CEO, Christopher Bailey, as customers, many of them tourists, browsed the rails. The store -- a cavernous former 20s cinema -- was refurbished in 2012 with multiple giant screens, a stage for live performances, four photo-studios and an editing suite. On the walls, digital screens display images from catwalk shows and slick advertising campaigns.

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The defining principle is that every element on the company's website, Burberry World, should be recreated offline. For instance, the taxonomy of the website is replicated in-store, and initiatives that start online -- such as a crowdsourced photo project on the trench coat -- take form on Regent Street and elsewhere. The pace of digital, and the appetite of Burberry's online customers for new product, means that as well as the twice-yearly seasonal drop of new collections, Burberry flows new product into its outlets on a monthly timescale, something that -- for luxury brands -- was largely unthinkable just five years ago. And, when that happens, the online and offline elements are coordinated so that advertising, landing pages on the website and all social platforms, as well as the visual merchandising, make a switch to reflect the new product. The Burberry narrative is tweaked just a little by both online and offline product and content that's generated by the 120 people in creative media -- including specialists in CGI -- employed by the company to produce a customer-facing aesthetic that is clear and consistent, speaking as one Burberry.

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Sales associates use the company's iPad app to build a picture of a customer -- what they've previously bought both online and offline, whether they have a partner, their choice of beverage -- in order to personalise the experience of being in-store. The app offers data on what's currently in stock and in the right size, colour, fit or style for a particular customer. If the shopper wants something that isn't in stock, it can be ordered on the tablet and will be delivered within 48 hours. If the customer is leaving on a trip, then the associate can check the availability of the product and have it reserved for the client or delivered to their home or hotel. It's effectively an elegant, personalised database that offers a granular view of the company's inventory by means of a real-time global network, meaning that Burberry is rarely out of stock.

With the company now spending far above industry norms on digital marketing channels (the budget for the launch of Burberry's Brit Rhythm for Men fragrance, for example, earmarked 30 per cent for digital -- the industry average is four per cent), the store feels part of a larger mission and is, as much as anything, a space for experimentation and entertainment as for shifting product.

Burberry expects customers to sometimes leave and purchase online, whereas on other occasions they will browse digitally before visiting a store to buy.

Create a richer in-store experience

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During the heady days of web 1.0, content was king. In the new world of shopping, context has assumed a similar status. As we rely more on mobile devices, the in-store experience will increasingly depend on how digital can influence offline behaviour and decisions. Combining a richer in-store experience with mobile relies on real-world context.

Economists point out that the associated fixed costs of bricks-and-mortar retail -- rent, staffing, inventory etc -- put physical retailers at a disadvantage compared to online, so-called "pure play" retailers. But a real-world location has advantages.

Disney is credited with creating the term "merchantainment" (its sales associates have to take a class in the subject at Disney University). It refers to the retail-store strategy of offering environments where consumers want to spend time and money. Boots, for instance, has started a programme, in partnership with Macmillan, that offers No7 make-up experts to advise those undergoing chemotherapy. Ralph Lauren stores are "movie sets" that allow customers to absorb the sensibility of the brand. Warby Parker, the high-end eyewear startup with $57.1 million in venture funding, started as online-only, but has recently signed a ten-year site lease opposite the Apple Store in New York's SoHo. "I expect customers to be demanding a more contextually sensitive in-store experience, and their phone or iWatch, or whatever the next thing is, will be in favour of that," says Rebecca Hornbuckle, a designer specialising in retail at IDEO. "The value that they're getting will be based on an experience."

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Anyone who has searched for a product online usually find themselves served advertising for that item for weeks afterwards.

Now imagine you're walking along the high street and every retailer you pass sends offers and coupons to your device. The slightly creepy efficiency of online marketing will seem a lot less intrusive when you're served a voucher for anti-dandruff shampoo as you walk past a chemist. "It's hard to send you something that's really relevant,"

Michiel Kotting says. "The initial usage frequency isn't high enough, so they don't learn enough about you and it doesn't become relevant to you."

In May and June 2013, London outdoor-advertising startup Media Metric placed devices called Renew Orbs in 12 internet-connected bins in the City of London. These used the unique media access control (MAC) addresses of passing smartphones to identify the proximity, speed and frequency of passers-by, and the manufacturer of their device. The project was shut down after two and a half months because of privacy concerns after more than 500,000 MAC numbers were recorded. "There's a balance to strike about how targeted and how personal you are in-store and what you do with customers' information,"

Rebecca Hornbuckle says. "Shoppers are looking for experiences that are social and entertaining. You want customers to linger and browse, and there's that serendipity that could be easily taken away if you start being too focused with technology." "Having doors all over the world is an amazing media channel," says Antonio Bertone, who argues that brands need to be better at storytelling. "You have a way of broadcasting. Retailers need to figure out what it is." However, Bertone warns that retailers face unstoppable online trends: "Twentysomethings search for bargains online, because that in and of itself is just as much fun [as going to a store]."

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Take advantage of smart pricing

Technology companies are increasingly interested in the branding abilities of executives in the luxury sector -- especially if they have experience in real-world stores. Apple recently hired Angela Ahrendts from Burberry to run its retail business, and Paul Deneve from Yves Saint Laurent to run its special-projects unit.

The luxury- and department-store sensibility is largely expressed through curation -- and Paco Underhill argues that physical retailers must harness this advantage; they can have, say, ten stand-out pairs of shoes in-store rather than the baffling array offered by Amazon. A real-world store can offer options such as different prices according to whether the goods were taken away immediately, delivered to the home or picked up from an arranged point at a future date. Essentially, there will be a premium for access and convenience, and a discount if the consumer chooses to wait. "We'll get to a point where those three things actually have three separate prices and that the customer understands why it's a little more expensive to buy it in-store versus picking it up later," Underhill says.

Retailers accept that the days of hiding behind their location and hoping that customers aren't motivated enough to go elsewhere are long gone. However, there is still trust in brands and, although transparency in pricing is a powerful consumer motivator, being cheapest doesn't guarantee loyalty -- as long as there are other benefits. "I don't think people are going to chop and change just because somebody's prices are 5p cheaper," says Richard Cuthbertson of the Oxford Institute of Retail Management. He believes that retailers will have to experiment with models and iterate them for different types of consumer. "Just because one price is being offered, maybe there is a better price that can be offered and maybe it's worth asking. Mobile-phone companies have taught us: do you want regular payment with everything thrown in, or do you want to have a situation whereby you get charged more because you're not a regular customer?"

Reward customers for more than purchasing

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Loyalty is retail's big prize. The cost of acquiring a customer is -- according to what data you look at -- between six and ten times greater than retaining one. One startup that's working in this space is San Francisco-based Shopkick. The platform, which has $50m in funding from some of the biggest investors in Silicon Valley, including Greylock Partners, Ron Conway and Reid Hoffman, is a "geocouponing" system that recognises customers as soon as they enter a store -- and rewards them for doing so. "One hundred years ago, if you had gone shopping, they would have welcomed you by name," says Cyriac Roeding, its cofounder. "Nowadays they only know you're at the store when you've paid."

There are no cards and no coupons: customers that have linked the app to a Visa or MasterCard are recognised as they cross the threshold and earn a "kick", a virtual currency that can be spent at retailers such as Starbucks, NIKEiD and Tiffany. "Conversion rates in the physical stores are way better than in the online world," Roeding says. "The conversion rate from going to a site to buying something is only 0.5 to three per cent. In the real world it's 20 in fashion, 50 per cent in electronics and 95 per cent in grocery stores."

Roeding sees Shopkick as a way of bridging the gap between online and physical through a personalised app that rewards shoppers not for purchases but just for visiting the store.

Believing that GPS isn't accurate enough, the Shopkick team designed a small, white plastic box that plugs into a power outlet and doesn't need Wi-Fi or internet. It emits a signal above the range of human hearing, but which can be detected by smartphones.

Inside the signal is a unique code for each store. The startup has cut deals with 7,000 retailers and has partnered with brands such as Target, Macy's, Old Navy and Exxon. Another San Francisco-based e-commerce startup, Curebit, offers users store credit if their friends make a purchase using a discount code.

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Other retailers are developing native apps to improve the customer experience in their own stores -- and in competitors'.

According to McKinsey, 36 per cent of shoppers who go online in stores are actually visiting the retailer's own app or mobile site -- the single most common in-store use of smartphones. In the US, the Walmart app will map out the fastest way through the aisles according to your shopping list and, if you're unable to find the item you need, it lets you have it shipped to your home. McKinsey research shows that, on average, customers who use the Walmart platform make two additional visits to the store each month and spend 40 per cent more than those who don't use the digital interface.

Kiddicare, a big-box children's retailer based in Peterborough, has a smartphone app that enables users to scan the barcode of any baby item in any other store and compare it with the Kiddicare price. Target's app lets you locate sale items, refill prescriptions and check if an item is in stock, before even visiting a physical store.

Leverage your consumer's tech

Mobile allows retailers to make it easier for customers to ensure that they're getting the best deal. Kiddicare's app can be used to scan electronic shelf labels to make real-time comparisons with a thousand leading products against Amazon. "It's not just about influencing the customer," Forrester's Gill says. "They're looking for which products people are scanning in-store and then not buying. They then understand which products customers are looking for in-store, which ones are converting and which ones aren't converting. They can then feed that information into the top browsed products, so they're merging the in-store behaviour with the mobile behaviour." "We don't see the distinction between online and pure play,"

Cuthbertson says. "And it's going to be very difficult to understand what we mean by 'transaction' because the payment can go on anywhere -- it doesn't matter whether it's in-store or just having a direct debit taken once a month. All of that is quite irrelevant."

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Christoffer Rudquist

Indeed, some retailers foresee the end of the cash register itself. Hornbuckle recalls a gathering of 12 retail executives in Chicago. Several admitted that the registers in their shops were so dated they had to buy replacement parts on eBay. "At least one of the CEOs of these major retailers came out and said, 'We're never buying another cash register'," Hornbuckle recalls. "The technology that our customers walk in with is far more powerful, so let's leverage that."

Sweat your asset

At first glance, Tesco's Watford superstore, on a bleak suburban ring-road, surrounded by other big-box retailers, seems an unlikely place to find the future. But this is where Tesco -- responsible for one third of all grocery shopping in the UK -- trials its latest products and services.

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Near the entrance to the store is a Euphorium bakery where fresh bread is laid out boulangerie-style on a wooden table. The offerings remain largely untouched, as if shoppers are anxious not to disturb the artifice. Next to the bakery is Harris & Hoole, a café featuring tattooed baristas, filament light-bulbs and artfully arranged bric-a-brac that has clearly been designed with Brooklyn in mind.

The overall impression of the bakery and café is a little uncanny, a version of a high street that none of us has ever visited. Yet sluggish growth in traditional areas means that supermarkets are looking to leisure and food service to provide alternative revenue streams and make the supermarket experience more palatable.

One Wednesday morning last September, Paul Wilkinson was taking a look around the store. Wilkinson is an unlikely Tesco employee: having completed an undergraduate degree in nanotechnology, he moved to the National Space Science Academy in Harwell to complete a PhD in high-frequency electronics for space. He now runs the research-and-development lab at Tesco. "Our remit is to look for new technologies," he explains. "We spend a lot of time with our large tech providers understanding their future road maps. And they then introduce us to networks of partners which opens up possibilities for talking to startups."

In June 2013, Wilkinson spent a week in Silicon Valley -- "It was incredible to see the investment in technology," he says. He oversees 24-hour hackathons that take place between Tesco teams in the UK and Bangalore. "Products have been launched off the back of that, such as an augmented-reality app."

Walking through the aisles, Wilkinson points out the low-level fixtures at the Watford store, the use of QR codes in the produce section that leads customers to information about the products and offers recipe ideas, and a piece of technology known internally as the "broccoli cam" -- a series of cameras in the ceiling that monitor produce units. If the cameras detect that these containers are empty, a message is sent to the shop floor to replenish them.

Elsewhere there is a homeware section that resembles a department store; aisles with touchscreens that help customers to select wines or find out which single malt is right for them; and an enormous screen called the "endless aisle" which enables users to scroll through all Tesco products in-store and then buy them on their phone or take a ticket to a service desk. Near the ready meals there is an area of shelving devoted to blinkbox, Tesco's pay-as-you-go online movie service, and part of its developing content business, which includes the seven-inch Hudl Android tablet.

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Wilkinson talks about future opportunities for Tesco, such as 3D printing. "It's that one-on-one thing if you can personalise something. Imagine you've got a robot builder on a big screen or on an app. Kids can pick the heads, the body, the arms; they can pick the name and a day later they can have it in their hand. That's so compelling," he says. "We already do that with photos -- it's not too different to think about 3D printing in that way. We've got recycling centres in a lot of our stores. What if you could turn the recycled plastic back into products on-site? "I look back at my PhD and, in ten years' time, there was a fair chance that the thing I designed would end up in space,"

Wilkinson says. "But the immediacy of the impact is that much greater here -- because you could be figuring out checkouts that affect millions of people every week -- which is huge."